## _cr12186 - Introduction

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---

### Introduction and scope
- Assessment forms part of the joint International Monetary Fund (IMF) - World Bank Indonesia Financial Sector Assessment Program (FSAP) undertaken during 2009-2010.
- Assessment focus:
  - Observance of the CPSS/IOSCO Recommendations for Securities Settlement Systems for the private sector equity and corporate bonds securities system.
  - Two types of trades assessed:
    - Equity transactions traded on the stock exchange IDX, cleared through the KPEI clearing system (e-CLEARS) and settled through the KSEI settlement system (C-BEST).
    - Corporate bond transactions traded outside the exchange and settled through the KSEI settlement system (C-BEST).
- Mission dates: ad hoc mission (12 – 19 December 2009).
- Assessment approach:
  - Conducted on processes and functions (not institutions).
  - Included processes relating to OTC corporate bond trades and cash settlement arrangements with four payment banks.
- Assessor and cooperation:
  - Undertaken by Froukelien Wendt, Senior Policy Advisor of the Oversight Department of De Nederlandsche Bank on request of the World Bank.
  - Conducted in cooperation with Bapepam-LK, Bank Indonesia, IDX, KPEI, KSEI, a securities company, and three custodian banks (two of which are also “payment” banks).
  - Drafted in close cooperation with the assessors of the Bank Indonesia Scripless Securities Settlement System to ensure consistency.

### Information and methodology used for assessment
- Sources of information:
  - Interviews with officials from Bapepam-LK, Bank Indonesia (BI), IDX, KPEI, KSEI, a securities company, and three custodian banks.
  - Documents provided by authorities, including a detailed self assessment of the equity and corporate bond securities settlement systems.
  - Other documentary sources included materials posted on Bapepam-LK, IDX, KPEI and KSEI websites, the Capital Market Law, Government Regulation No. 45, Bapepam-LK Regulations, Rule books of IDX, KPEI and KSEI, and the Bankruptcy Law.
- Assessment tools referenced:
  - IOSCO-CPSS “Recommendations for Securities Settlement Systems”.
  - IOSCO-CPSS “Assessment Methodology for Recommendations for Securities Settlement Systems”.
  - Bank-Fund “Guidance for Writing Detailed Assessments for Reports on Observance of Standards and Codes”.

### Institutional and market structure—overview
- Regulatory responsibilities:
  - Bapepam-LK (Capital Market Supervisory Agency) holds regulatory responsibility for trading, clearing and settlement of equities and corporate bonds and reports to the Minister of Finance of The Republic of Indonesia.
- Self Regulatory Organizations (SROs) and roles:
  - IDX (Stock Exchange) — provides rules, systems and facilities for trading securities and supervises members’ activities.
  - KPEI (Clearing Guarantee Institution) — central counterparty (CCP) that clears and guarantees settlement of securities exchange transactions; provides rules for that purpose.
  - KSEI (Central Securities Depository) — central custodian for custodian banks, securities companies and others; provides rules for that purpose.
- Legal framework elements referenced:
  - Capital Market Law of 1995, Indonesian Civil Code, Government Regulation No. 45, Bapepam-LK Regulations, Rules of IDX, KPEI and KSEI, contractual arrangements between SROs and participants, and the Bankruptcy Law.
- Market participants and counts (as at end of December 2009):
  - 489 issuers
  - 130 securities companies
  - 22 custodian banks
  - 10 registrars
  - 386.436 sub accounts
  - From the securities companies, 120 are exchange and clearing member, of which 114 are active.
  - In the current structure all exchange members are clearing members.
- Tradable securities and market segments:
  - Tradable: stocks, exchange traded funds (ETFs), corporate bonds, government bonds, stock options index futures and asset backed securities.
  - Stock exchange segments:
    - regular market — electronic order book; settlement T+3
    - cash market — morning session continuous auctions; settlement T+0
    - immediate market — currently closed
    - negotiated market — trading via advertising screens; settlement cycles negotiable and may be longer than T+3; trades in negotiated market are not netted but cleared trade by trade
- Market activity and balances (end of December 2009 and averages):
  - Average stock exchange total turnover: IDR 4.49 trillion per day
  - Average corporate bonds turnover: IDR 161 billion per day
  - Equity market capitalization: IDR 2,019.38 trillion
  - Corporate bonds outstanding: IDR 88.33 trillion
  - Stock exchange turnover mainly from equity trades; stock exchange volumes for corporate bonds and government bonds are low due to OTC preference.
  - ETFs, stock options and index futures volumes are close to zero.
- Dematerialization:
  - All securities issued and traded in the Stock Exchange after introduction of the scripless system in 2000 are held in dematerialized form. Stocks still in physical form cannot be traded on the exchange.
- OTC trading and settlement:
  - OTC trades are bilaterally concluded and settled by KSEI.
  - Reporting of OTC trades is via the Beneficiary of Securities Transaction Report generated by an IDX-provided computer system.
  - Central registry and settlement for corporate bonds handled through KSEI with settlement at T+2.
  - All bonds issued after the introduction of the scripless system in 2000 are held in dematerialized form.
- Cash settlement mechanics:
  - Cash settlement for equities and corporate bonds occurs in the cash accounts of one of four “payment” banks: Bank Mandiri, BCA, Bank CIMB Niaga and Bank Permata.
  - Every broker required to open a cash account with one of the payment banks.
  - KSEI’s C-BEST securities accounts mirror cash accounts of account holders at payment banks for settlement purposes.
  - KSEI’s settlement mechanism: securities and cash legs transferred simultaneously in C-BEST followed by reconciliation within the cash accounts (KSEI’s Nostro Account) in the payment banks.
  - Realignment of payment bank accounts into BI-RTGS occurs six times a day at 09:00, 10:30, 11:30, 13:30, 14:20, and 15:10 using BI-RTGS.
  - For government bonds traded on the stock exchange and OTC between KSEI’s participants, cash and securities settlement is conducted in KSEI.
  - For OTC trading in government bonds between KSEI’s participant and a sub registry member of BI, securities transfer is effected in BI-SSSS and cash settlement directly in BI-RTGS.
  - Possibility of linking KSEI to BI-RTGS for equity and corporate bonds is under discussion.

### Key statistics and operational timings (preserved exactly as in source)
- Mission dates: (12 – 19 December 2009)
- Market participant counts (as at end of December 2009):
  - 489 issuers
  - 130 securities companies
  - 22 custodian banks
  - 10 registrars
  - 386.436 sub accounts
  - 120 exchange and clearing members (of which 114 are active)
- Market values and averages (as at end of December 2009 / 2009 averages):
  - Average stock exchange total turnover: IDR 4.49 trillion per day
  - Average corporate bonds turnover: IDR 161 billion per day
  - Equity market capitalization: IDR 2,019.38 trillion
  - Corporate bonds outstanding: IDR 88.33 trillion
  - Negotiated market share of total transaction value in 2009: 17%
- BI-RTGS realignment times: 09:00, 10:30, 11:30, 13:30, 14:20, and 15:10
- Historical defaults: Since 2002, four securities companies have defaulted.
- Example outage date: 12 November 2009

---

### Main findings — Legal framework
- Overall finding:
  - Legal framework supports some, but not all, key elements of clearing and settlement.
- Key legal concepts insufficiently addressed:
  - Netting
  - Finality
  - Delivery-versus-payment (DVP)
- Specific deficiencies and recommendations:
  - Finality of settlement is not covered directly in the legal framework nor is it specified when a trade is irrevocable and unconditional.
  - DVP is not defined in the Rules of KSEI for all types of transactions.
  - Legal framework does not provide guidance to the cash settlement arrangements within payment banks.
  - Recommendation: legal framework should include netting, finality, and DVP concepts in line with international definitions.
- Detailed assessment grading: RSSS 1 (Legal framework): PO

### Main findings — Pre-settlement risk
- Negotiated market settlement cycle:
  - No standardized settlement process; settlement can occur later than T+3 if participants agree.
  - Negotiated market used mainly for block trades.
  - In 2009, 17% of the total value of transactions were concluded in the negotiated market.
  - Recommendation: devote serious analysis to making T+3 the settlement standard for all stock exchange transactions.
- Trade confirmation:
  - Confirmation of stock exchange trades occurs in real time.
  - Confirmation for corporate bonds traded OTC is estimated to be 68% on the same day.
  - Recommendation: Implement a watertight system for trade confirmation reporting on T+0.
  - Detailed assessment grading: RSSS 2 (Confirmation): O; RSSS 3 (Rolling settlement/T+3): BO

### Main findings — Central counterparty (KPEI)
- Observations:
  - KPEI broadly observes CCP requirements and has addressed legal, financial and operational risk in rules, financial and operational framework.
  - Since 2002, four securities companies have defaulted.
- Recommendations for KPEI:
  - Improve access criteria so that only the largest, best capitalized securities companies are clearing members (currently all stock exchange members are clearing members).
  - Improve financial risk methods by using more advanced models with parameters based on historic price movements and historic volatility, taking into account characteristics of different types of securities.
  - Introduce back tests for the margin model.
  - Regularly test adequacy of all resources in case of default of the clearing member with the largest exposure in extreme market circumstances to guide appropriate size of the guarantee fund.
  - Introduce a cap for the replenishment of the guarantee fund by clearing members in case of a loss that cannot be covered by the existing guarantee fund (currently no cap exists).
  - Improve operational procedures to avoid data loss and consider a larger distance between primary and secondary sites.
- Detailed assessment grading: RSSS 4 (CCP risk control): BO

### Main findings — Settlement risk
- Payment bank model risks:
  - Cash settlement through four dedicated payment banks exposes market participants to settlement bank risk (operational or financial failure of a payment bank).
  - Settlement volumes are sufficiently spread over the payment banks, but the model still carries systemic exposures.
  - Operational outages of a payment bank can affect all other payment banks (example noted).
- Case example:
  - On 12 November 2009, settlement system was only able to settle securities at 9 pm while the RTGS closed before 9 pm; payment banks were exposed to each other and/or KSEI due to delayed realignment until the next morning.
  - Recommendation: KSEI and BI-RTGS should harmonize opening hours in extreme situations while the payment bank settlement system remains in place.
- DVP and finality concerns:
  - KSEI’s C-BEST technical framework ensures simultaneous transfer of securities and cash (DVP) at the technical level.
  - Limitation: KSEI has no real cash account in C-BEST; C-BEST accounts mirror cash accounts at payment banks.
  - Legal framework does not provide sufficient comfort that the cash transfer in C-BEST is a final transfer.
  - Time lag exists between securities transfer in C-BEST and real cash transfer in the payment banks, potentially allowing final delivery of securities to precede final cash transfer.
  - Systemic risk example: bankruptcy of a payment bank could expose the system if finality and legal protections are unclear.
  - Recommendation: strengthen legal comfort regarding finality of cash transfers reflected in C-BEST.
- Detailed assessment gradings:
  - RSSS 7 (DVP linkage): PO
  - RSSS 8 (Final settlement finality): PO
  - RSSS 9 (Intraday credit controls): NA
  - RSSS 10 (Settlement assets credit risk): O

### Main findings — Operational risk and custody
- Operational risk:
  - C-BEST system of KSEI observes Recommendation 11.
  - Issues and recommendations:
    - Strongly encourage measures to prevent simultaneous unavailability of primary and secondary sites (as occurred on 12th November 2009).
    - Encourage consideration of more geographically disparate production and back-up processing for IDX, KPEI and KSEI systems.
  - Detailed assessment grading: RSSS 11 (Operational risk controls): O
- Custody risk:
  - Sub-Registries are required to maintain internal systems that record holdings clearly, separating own from clients’ assets; this separation safeguards clients’ assets in event of Sub-Registry insolvency.
  - Detailed assessment grading: RSSS 12 (Custody accounting and safekeeping): O

### Main findings — Other institutional arrangements
- Regulation, oversight, and inter-agency cooperation:
  - Bapepam-LK has regulatory responsibilities over BI-SSSS, IDX, KPEI and KSEI.
  - BI has an oversight responsibility over BI-SSSS, a system it owns.
  - Recommendation: review the structure so that all systems, especially the two CSDs, are regulated in a comparable way.
  - Recommendation: BI should consider including KSEI and KPEI in its oversight scope as systems relevant for Indonesia’s financial stability.
  - BI should consider the role of lender of last resort for the CCP, taking into account moral hazard risks.
  - Bapepam-LK and BI may consider formalizing cooperative intentions (for example, via a covenant or memorandum of understanding) to clarify respective responsibilities.
  - Responsibility grading: RSSS 13–18 summary includes BO and O gradings; see Summary observance below.

---

### Recommended Action Plan (selected entries)
- Legal risk (Recommendation 1):
  - Include concepts of netting, finality and DVP in the legal framework for all types of transactions in line with international definitions.
- Rolling settlement (Recommendation 3):
  - Investigate whether T+3 should also apply to stock exchange trades conducted in the negotiated market.
- CCP risk controls (Recommendation 4):
  - Introduce legal requirements for finality and DVP for CCP.
  - Improve access criteria; adopt historic-based margin calculations, back testing, resource adequacy testing, guarantee fund cap, data loss prevention, and greater separation between primary and secondary sites.
- DVP and finality (Recommendations 7 and 8):
  - Reflect DVP in legal framework; explicitly state the moment when securities and cash legs become irrevocable and unconditional, noting KPEI account usage within KSEI.
- International communications (Recommendation 16):
  - All KSEI members handling cross-border transactions should become SWIFT members or use another relevant international network; use domestic procedures easily convertible into SWIFT.
- Regulation and oversight (Recommendation 18):
  - Bapepam-LK and BI should strengthen and formalize cooperation.

---

### Authorities’ responses (highlights)
- Bapepam-LK disagreed with the assessment that netting, finality and DVP were not adequately supported by current legal framework, citing various law sections; assessment on RSSS 1 remained unchanged due to absence of explicit provisions.
- On settlement cycles (RSSS 3), Bapepam-LK believes current arrangements comply with best practice despite negotiated market not meeting T+3.
- Authorities indicated that some concerns related to RSSS 4 are being addressed, including review of access criteria, enhancement of risk management arrangements and increasing distance between primary and secondary sites.
- KSEI is developing STP capabilities within C-BEST; harmonization of operating hours between the RTGS system and KSEI is being considered.
- BI and Bapepam-LK are discussing merging the two depositories and establishing a Memorandum of Understanding to enhance cooperation.

---

### Summary observance (key gradings preserved exactly as in source)
- RSSS 1 (Legal framework): PO
- RSSS 2 (Confirmation): O
- RSSS 3 (Rolling settlement/T+3): BO
- RSSS 4 (CCP risk control): BO
- RSSS 5 (Securities lending and borrowing): O
- RSSS 6 (Dematerialization): O
- RSSS 7 (DVP linkage): PO
- RSSS 8 (Final settlement finality): PO
- RSSS 9 (Intraday credit controls): NA
- RSSS 10 (Settlement assets credit risk): O
- RSSS 11 (Operational risk controls): O
- RSSS 12 (Custody accounting and safekeeping): O

*Summary based on the content of “_cr12186 - Introduction ...........................................................................................................”*

### Introduction ...........................................................................................................

### _cr12186 - Introduction ...........................................................................................................

### Introduction and scope
- Assessment forms part of the joint International Monetary Fund (IMF) - World Bank Indonesia Financial Sector Assessment Program (FSAP) undertaken during 2009-2010.
- Assessment focus:
  - Observance of the CPSS/IOSCO Recommendations for Securities Settlement Systems for the private sector equity and corporate bonds securities system.
  - Two types of trades assessed:
    - Equity transactions traded on the stock exchange IDX, cleared through the KPEI clearing system (e-CLEARS) and settled through the KSEI settlement system (C-BEST).
    - Corporate bond transactions traded outside the exchange and settled through the KSEI settlement system (C-BEST).
- Mission dates: ad hoc mission (12 – 19 December 2009).
- Assessment approach:
  - Conducted on processes and functions (not institutions).
  - Included processes relating to OTC corporate bond trades and cash settlement arrangements with four payment banks.
- Assessor and cooperation:
  - Undertaken by Froukelien Wendt, Senior Policy Advisor of the Oversight Department of De Nederlandsche Bank on request of the World Bank.
  - Conducted in cooperation with Bapepam-LK, Bank Indonesia, IDX, KPEI, KSEI, a securities company, and three custodian banks (two of which are also “payment” banks).
  - Drafted in close cooperation with the assessors of the Bank Indonesia Scripless Securities Settlement System to ensure consistency.

### Information and methodology used for assessment
- Sources of information:
  - Interviews with officials from Bapepam-LK, Bank Indonesia (BI), IDX, KPEI, KSEI, a securities company, and three custodian banks.
  - Documents provided by authorities, including a detailed self assessment of the equity and corporate bond securities settlement systems.
  - Other documentary sources included materials posted on Bapepam-LK, IDX, KPEI and KSEI websites, the Capital Market Law, Government Regulation No. 45, Bapepam-LK Regulations, Rule books of IDX, KPEI and KSEI, and the Bankruptcy Law.
- Assessment tools referenced:
  - IOSCO-CPSS “Recommendations for Securities Settlement Systems”.
  - IOSCO-CPSS “Assessment Methodology for Recommendations for Securities Settlement Systems”.
  - Bank-Fund “Guidance for Writing Detailed Assessments for Reports on Observance of Standards and Codes”.

### Institutional and market structure—overview
- Regulatory responsibilities:
  - Bapepam-LK (Capital Market Supervisory Agency) holds regulatory responsibility for trading, clearing and settlement of equities and corporate bonds and reports to the Minister of Finance of The Republic of Indonesia.
- Self Regulatory Organizations (SROs) and roles:
  - IDX (Stock Exchange) — provides rules, systems and facilities for trading securities and supervises members’ activities.
  - KPEI (Clearing Guarantee Institution) — central counterparty (CCP) that clears and guarantees settlement of securities exchange transactions; provides rules for that purpose.
  - KSEI (Central Securities Depository) — central custodian for custodian banks, securities companies and others; provides rules for that purpose.
- Legal framework elements referenced:
  - Capital Market Law of 1995, Indonesian Civil Code, Government Regulation No. 45, Bapepam-LK Regulations, Rules of IDX, KPEI and KSEI, contractual arrangements between SROs and participants, and the Bankruptcy Law.
- Market participants and counts (as at end of December 2009):
  - 489 issuers
  - 130 securities companies
  - 22 custodian banks
  - 10 registrars
  - 386.436 sub accounts
  - From the securities companies, 120 are exchange and clearing member, of which 114 are active.
  - In the current structure all exchange members are clearing members.
- Tradable securities and market segments:
  - Tradable: stocks, exchange traded funds (ETFs), corporate bonds, government bonds, stock options index futures and asset backed securities.
  - Stock exchange segments:
    - regular market — electronic order book; settlement T+3
    - cash market — morning session continuous auctions; settlement T+0
    - immediate market — currently closed
    - negotiated market — trading via advertising screens; settlement cycles negotiable and may be longer than T+3; trades in negotiated market are not netted but cleared trade by trade
- Market activity and balances (end of December 2009 and averages):
  - Average stock exchange total turnover: IDR 4.49 trillion per day
  - Average corporate bonds turnover: IDR 161 billion per day
  - Equity market capitalization: IDR 2,019.38 trillion
  - Corporate bonds outstanding: IDR 88.33 trillion
  - Stock exchange turnover mainly from equity trades; stock exchange volumes for corporate bonds and government bonds are low due to OTC preference.
  - ETFs, stock options and index futures volumes are close to zero.
- Dematerialization:
  - All securities issued and traded in the Stock Exchange after introduction of the scripless system in 2000 are held in dematerialized form. Stocks still in physical form cannot be traded on the exchange.
- OTC trading and settlement:
  - OTC trades are bilaterally concluded and settled by KSEI.
  - Reporting of OTC trades is via the Beneficiary of Securities Transaction Report generated by an IDX-provided computer system.
  - Central registry and settlement for corporate bonds handled through KSEI with settlement at T+2.
  - All bonds issued after the introduction of the scripless system in 2000 are held in dematerialized form.
- Cash settlement mechanics:
  - Cash settlement for equities and corporate bonds occurs in the cash accounts of one of four “payment” banks: Bank Mandiri, BCA, Bank CIMB Niaga and Bank Permata.
  - Every broker required to open a cash account with one of the payment banks.
  - KSEI’s C-BEST securities accounts mirror cash accounts of account holders at payment banks for settlement purposes.
  - KSEI’s settlement mechanism: securities and cash legs transferred simultaneously in C-BEST followed by reconciliation within the cash accounts (KSEI’s Nostro Account) in the payment banks.
  - Realignment of payment bank accounts into BI-RTGS occurs six times a day at 09:00, 10:30, 11:30, 13:30, 14:20, and 15:10 using BI-RTGS.
  - For government bonds traded on the stock exchange and OTC between KSEI’s participants, cash and securities settlement is conducted in KSEI.
  - For OTC trading in government bonds between KSEI’s participant and a sub registry member of BI, securities transfer is effected in BI-SSSS and cash settlement directly in BI-RTGS.
  - Possibility of linking KSEI to BI-RTGS for equity and corporate bonds is under discussion.

### Main findings — Legal framework
- Overall finding:
  - Legal framework supports some, but not all, key elements of clearing and settlement.
- Key legal concepts insufficiently addressed:
  - Netting
  - Finality
  - Delivery-versus-payment (DVP)
- Specific deficiencies and recommendations:
  - Finality of settlement is not covered directly in the legal framework nor is it specified when a trade is irrevocable and unconditional.
  - DVP is not defined in the Rules of KSEI for all types of transactions.
  - Legal framework does not provide guidance to the cash settlement arrangements within payment banks.
  - Recommendation: legal framework should include netting, finality, and DVP concepts in line with international definitions.

### Main findings — Pre-settlement risk
- Negotiated market settlement cycle:
  - No standardized settlement process; settlement can occur later than T+3 if participants agree.
  - Negotiated market used mainly for block trades.
  - In 2009, 17% of the total value of transactions were concluded in the negotiated market.
  - Recommendation: devote serious analysis to making T+3 the settlement standard for all stock exchange transactions.
- CCP (KPEI) observations and recommendations:
  - KPEI broadly observes CCP requirements and has addressed legal, financial and operational risk in rules, financial and operational framework.
  - Recommendations for KPEI:
    - Improve access criteria so that only the largest, best capitalized securities companies are clearing members (currently all stock exchange members are clearing members).
    - Improve financial risk methods by using more advanced models with parameters based on historic price movements and historic volatility, taking into account characteristics of different types of securities.
    - Introduce back tests for the margin model.
    - Regularly test adequacy of all resources in case of default of the clearing member with the largest exposure in extreme market circumstances to guide appropriate size of the guarantee fund.
    - Introduce a cap for the replenishment of the guarantee fund by clearing members in case of a loss that cannot be covered by the existing guarantee fund (currently no cap exists).
    - Improve operational procedures to avoid data loss and consider a larger distance between primary and secondary sites.
- Historical context:
  - Since 2002, four securities companies have defaulted.

### Main findings — Settlement risk
- Payment bank model risks:
  - Cash settlement through four dedicated payment banks exposes market participants to settlement bank risk (operational or financial failure of a payment bank).
  - Settlement volumes are sufficiently spread over the payment banks, but the model still carries systemic exposures.
  - Operational outages of a payment bank can affect all other payment banks (example noted).
- Case example:
  - On 12 November 2009, settlement system was only able to settle securities at 9 pm while the RTGS closed before 9 pm; payment banks were exposed to each other and/or KSEI due to delayed realignment until the next morning.
  - Recommendation: KSEI and BI-RTGS should harmonize opening hours in extreme situations while the payment bank settlement system remains in place.
- DVP and finality concerns:
  - KSEI’s C-BEST technical framework ensures simultaneous transfer of securities and cash (DVP) at the technical level.
  - Limitation: KSEI has no real cash account in C-BEST; C-BEST accounts mirror cash accounts at payment banks.
  - Legal framework does not provide sufficient comfort that the cash transfer in C-BEST is a final transfer.
  - Time lag exists between securities transfer in C-BEST and real cash transfer in the payment banks, potentially allowing final delivery of securities to precede final cash transfer.
  - Systemic risk example: bankruptcy of a payment bank could expose the system if finality and legal protections are unclear.
  - Recommendation: strengthen legal comfort regarding finality of cash transfers reflected in C-BEST.

### Main findings — Other issues and institutional arrangements
- Regulatory and oversight structure concerns:
  - Bapepam-LK has regulatory responsibilities over BI-SSSS, IDX, KPEI and KSEI.
  - BI has an oversight responsibility over BI-SSSS, a system it owns.
  - Recommendation: review the structure so that all systems, especially the two CSDs, are regulated in a comparable way.
  - Recommendation: BI should include KSEI and KPEI in its oversight scope as systems relevant for Indonesia’s financial stability.
  - BI should consider the role of lender of last resort for the CCP, taking into account moral hazard risks.
  - Bapepam-LK and BI may consider formalizing cooperative intentions (for example, via a covenant or memorandum of understanding) to clarify respective responsibilities.

### Key statistics and operational timings (preserved exactly as in source)
- Mission dates: (12 – 19 December 2009)
- Market participant counts (as at end of December 2009):
  - 489 issuers
  - 130 securities companies
  - 22 custodian banks
  - 10 registrars
  - 386.436 sub accounts
  - 120 exchange and clearing members (of which 114 are active)
- Market values and averages (as at end of December 2009 / 2009 averages):
  - Average stock exchange total turnover: IDR 4.49 trillion per day
  - Average corporate bonds turnover: IDR 161 billion per day
  - Equity market capitalization: IDR 2,019.38 trillion
  - Corporate bonds outstanding: IDR 88.33 trillion
  - Negotiated market share of total transaction value in 2009: 17%
- BI-RTGS realignment times: 09:00, 10:30, 11:30, 13:30, 14:20, and 15:10
- Historical defaults: Since 2002, four securities companies have defaulted.
- Example outage date: 12 November 2009

_Italic: Summary based on the content of “_cr12186 - Introduction ...........................................................................................................”_

### 1. Securities settlement systems should have a well-

### 1. Securities settlement systems should have a well-

### Legal risk
- Finding: The legal framework supports some, but not all, of the key elements of the clearing and settlement process.
- Required for full observance: “netting”, “finality” as well as “delivery versus payment” should obtain explicit legal recognition, in line with international definitions.
- Detailed assessment grading: PO

### Pre-settlement risk
- Recommendation 2 (confirmation):
  - Trades should be confirmed as soon as possible after execution, but no later than trade date (T+0).
  - Indirect market participants should confirm preferably on T+0, but no later than T+1.
  - Finding: Confirmation of stock exchange trades occurs in real time (in line with the Recommendation).
  - Finding: Confirmation for corporate bonds traded OTC is estimated to be 68% on the same day.
  - Recommendation: Implement a watertight system for trade confirmation reporting on T+0.
  - Detailed assessment grading: O
- Recommendation 3 (rolling settlement):
  - Rolling settlement should be adopted; final settlement no later than T+3.
  - Finding: Settlement cycles for equities and corporate bonds vary from T+0 to T+3 (in line with the Recommendation).
  - Caveat: Settlement of trades conducted on the negotiated market segment of IDX may take place later than T+3 if participants agree.
  - Detailed assessment grading: BO

### Central counterparty (CCP)
- Recommendation 4:
  - Assess benefits and costs of a CCP; if introduced, it must rigorously control assumed risks.
  - Finding: KPEI, as CCP for stock exchange trades, has addressed legal risk, financial risk and operational risk in its rules and framework.
  - Recommendations:
    - Further improve access criteria, financial risk methods and operational procedures.
    - Improve risk profile by limiting clearing membership to the largest, best capitalized securities companies.
    - Use historic price movements and historic volatility to calculate margin; take into account characteristics of different types of securities.
    - Introduce back tests for its margin model and regular tests for adequacy of all resources in extreme market circumstances.
    - Introduce a cap for replenishment of the guarantee fund by clearing members.
    - Implement procedures to avoid data loss.
    - Consider a larger distance between primary and secondary sites.
  - Detailed assessment grading: BO

### Securities lending and borrowing
- Recommendation 5:
  - SLB (or repos and economically equivalent transactions) should be encouraged to expedite settlement; barriers should be removed.
  - Finding: SLB is available for equity trades on the stock exchange.
  - Finding: SLB is not available for corporate bonds traded OTC.
  - Recommendation: Extend the SBL service of KPEI to corporate bonds.
  - Detailed assessment grading: O

### Settlement risk
- Recommendation 6 (dematerialization):
  - Securities should be immobilized or dematerialized and transferred by book entry in CSDs.
  - Finding: KSEI holds securities in dematerialized form and transfers them electronically; dematerialization and electronic holding is covered by statute.
  - Detailed assessment grading: O
- Recommendation 7 (DVP linkage):
  - CSDs should eliminate principal risk by linking securities transfers to funds transfers to achieve delivery versus payment.
  - Finding: The C-BEST system of KSEI provides for technical DVP.
  - Issue: The legal framework does not fully support DVP.
  - Recommendation: DVP should be appropriately reflected in the legal framework.
  - Detailed assessment grading: PO
- Recommendation 8 (final settlement timing):
  - Final settlement should occur no later than the end of the settlement day; intra-day or real-time finality where necessary.
  - Finding: Settlement on DVP basis occurs within the day of settlement.
  - Issue: Finality is not a concept supported by the legal framework.
  - Recommendation: Legal framework should explicitly state the moment at which both securities and cash legs are irrevocable and unconditional; specify moment for stock exchange trades taking into account the KPEI account within KSEI.
  - Detailed assessment grading: PO
- Recommendation 9 (intraday credit controls):
  - If CSDs extend intraday credit or operate net settlement, institute risk controls ensuring timely settlement if the participant with the largest obligation fails.
  - Finding: There is no deferred net settlement within KSEI, nor does KSEI extend intraday credit to participants.
  - Detailed assessment grading: NA
- Recommendation 10 (low-credit-risk settlement assets):
  - Assets used to settle cash legs should carry little or no credit risk; if not central bank money, protect members from failure of the cash settlement agent.
  - Finding: Four payment banks are responsible for the cash settlement leg; structure observes the Recommendation.
  - Recommendation: Authorities should consider analyzing the possibility of introducing cash settlement in the BI-RTGS system to reduce capital market risk.
  - Detailed assessment grading: O

### Operational risk
- Recommendation 11:
  - Identify and minimize operational risk through appropriate systems, controls, capacity, contingency plans and back-up facilities.
  - Finding: C-BEST system of KSEI observes the Recommendation.
  - Issues and recommendations:
    - Strongly encourage measures to prevent simultaneous unavailability of primary and secondary sites (as occurred on 12th November 2009).
    - Encourage consideration of more geographically disparate production and back-up processing for IDX, KPEI and KSEI systems.
  - Detailed assessment grading: O

### Custody risk
- Recommendation 12:
  - Custodians should employ accounting practices and safekeeping procedures that fully protect customers’ securities and protect them against claims of a custodian’s creditors.
  - Finding: Sub-Registries are required to maintain internal systems that record holdings clearly, separating own from clients’ assets; this separation safeguards clients’ assets in event of Sub-Registry insolvency.
  - Detailed assessment grading: O

### Other issues and market infrastructure
- Recommendation 13 (governance):
  - Governance arrangements for CSDs and CCPs should fulfill public interest and promote objectives of owners and users.
  - Finding: Governance arrangements of KSEI and KPEI observe the Recommendation.
- Recommendation 14 (access criteria disclosure):
  - CSDs and CCPs should have objective and publicly disclosed participation criteria permitting fair and open access.
  - Recommendation: Access and exit criteria of KPEI should focus more on specificities of CCP membership.
- Recommendation 15 (cost-effectiveness):
  - Systems should be cost-effective while maintaining safety and security.
  - Finding: The STP project is an important initiative to enhance efficiency of the capital market of Indonesia.
- Recommendation 16 (international standards and communications):
  - Systems should use or accommodate relevant international communication procedures and standards to facilitate cross-border settlement.
  - Finding: About 77% of cross-border transactions are transmitted via the SWIFT network.
  - Practice: Domestic settlement agents convert SWIFT messages into internal systems for transmission to KSEI.
  - Recommendation: Increase percentage of cross-border transactions going through SWIFT or another relevant network; ensure conversion between SWIFT and domestic procedures is easy.
  - Detailed assessment grading (Recommendation 16): see Recommended Action Plan below.
- Recommendation 17 (disclosure of risks and costs):
  - CSDs and CCPs should provide sufficient information for participants to identify risks and costs.
  - Finding: Disclosure framework requirements are being met.
- Recommendation 18 (regulation and oversight):
  - Securities settlement systems should be subject to transparent and effective regulation and oversight; central banks and securities regulators should cooperate.
  - Recommendation: Review structure so all systems, especially the two CSDs, are regulated in a comparable way; BI should consider including KSEI and KPEI into their oversight scope.
  - Recommendation: Bapepam-LK and BI should agree formally on cooperation and coordination of responsibilities.
  - Authorities’ response: Bapepam-LK noted KSEI as sub-registry for government securities was already under BI supervision; BI and Bapepam-LK in discussion on merging two depositories and establishing a Memorandum of Understanding.
  - Detailed assessment grading: see Table 3 entries below.
- Recommendation 19 (cross-border links):
  - CSDs that establish cross-border links should design and operate them to effectively reduce cross-border settlement risks.
  - Finding: Currently, there are no cross border links.

### Recommended Action Plan (selected entries)
- Legal risk (Recommendation 1):
  - Include concepts of netting, finality and DVP in the legal framework for all types of transactions in line with international definitions.
- Rolling settlement (Recommendation 3):
  - Investigate whether T+3 should also apply to stock exchange trades conducted in the negotiated market.
- CCP risk controls (Recommendation 4):
  - Introduce legal requirements for finality and DVP for CCP.
  - Improve access criteria; adopt historic-based margin calculations, back testing, resource adequacy testing, guarantee fund cap, data loss prevention, and greater separation between primary and secondary sites.
- DVP and finality (Recommendations 7 and 8):
  - Reflect DVP in legal framework; explicitly state the moment when securities and cash legs become irrevocable and unconditional, noting KPEI account usage within KSEI.
- International communications (Recommendation 16):
  - All KSEI members handling cross-border transactions should become SWIFT members or use another relevant international network; use domestic procedures easily convertible into SWIFT.
- Regulation and oversight (Recommendation 18):
  - Bapepam-LK and BI should strengthen and formalize cooperation.

### Authorities’ responses (highlights)
- Bapepam-LK disagreed with the assessment that netting, finality and DVP were not adequately supported by current legal framework, citing various law sections; assessment on RSSS 1 remained unchanged due to absence of explicit provisions.
- On settlement cycles (RSSS 3), Bapepam-LK believes current arrangements comply with best practice despite negotiated market not meeting T+3.
- Authorities indicated that some concerns related to RSSS 4 are being addressed, including review of access criteria, enhancement of risk management arrangements and increasing distance between primary and secondary sites.
- KSEI is developing STP capabilities within C-BEST; harmonization of operating hours between the RTGS system and KSEI is being considered.
- BI and Bapepam-LK are discussing merging the two depositories and establishing a Memorandum of Understanding to enhance cooperation.

### Summary observance (Table 3 key gradings)
- RSSS 1 (Legal framework): PO
- RSSS 2 (Confirmation): O
- RSSS 3 (Rolling settlement/T+3): BO
- RSSS 4 (CCP risk control): BO
- RSSS 5 (Securities lending and borrowing): O
- RSSS 6 (Dematerialization): O
- RSSS 7 (DVP linkage): PO
- RSSS 8 (Final settlement finality): PO
- RSSS 9 (Intraday credit controls): NA
- RSSS 10 (Settlement assets credit risk): O
- RSSS 11 (Operational risk controls): O
- RSSS 12 (Custody accounting and safekeeping): O

*Source: _cr12186 - 1. Securities settlement systems should have a well- (IMF assessment PDF).*

### 13. Governance arrangements for CSDs and central

### 13. Governance arrangements for CSDs and central counterparties

### Governance and public interest
- Principle: Governance arrangements for CSDs and central counterparties should be designed to fulfill public interest requirements and to promote the objectives of owners and users.
- Finding: The governance arrangements of KSEI and KPEI observe the requirements of the Recommendation.
- Responsibility grading: O

### Participation, access, and exit criteria
- Principle: CSDs and central counterparties should have objective and publicly disclosed criteria for participation that permit fair and open access.
- Recommendation: In general, we recommend that the access and exit criteria of KPEI focus more on the specificities of membership of the CCP.
- Responsibility grading: O

### Cost-effectiveness and operational efficiency
- Principle: While maintaining safe and secure operations, securities settlement systems should be cost-effective in meeting the requirements of users.
- Finding / Recommendation: The STP project is an important initiative to enhance the efficiency of the capital market of Indonesia.
- Responsibility grading: O

### International communication procedures and cross-border settlement
- Principle: Securities settlement systems should use or accommodate the relevant international communication procedures and standards in order to facilitate efficient settlement of cross-border transactions.
- Finding: The majority of cross-border transactions (77%) are transmitted via SWIFT to the members of KSEI.
- Process detail: The members convert the SWIFT messages into their internal system to be able to forward them to the KSEI system.
- Responsibility grading: BO

### Disclosure of risks and costs
- Principle: CSDs and central counterparties should provide market participants with sufficient information for them to accurately identify the risks and costs associated with using the CSD or central counterparty services.
- Finding: Disclosure framework requirements are being met.
- Responsibility grading: O

### Regulation, oversight, and inter-agency cooperation
- Principle: Securities settlement systems should be subject to regulation and oversight. Central banks and securities regulators should cooperate with each other and with other relevant authorities.
- Finding / Current structure:
  - Bapepam-LK has regulatory responsibilities over BI-SSSS, as well as over IDX, KPEI and KSEI.
  - BI has an oversight responsibility over BI-SSSS, a system which it owns and operates.
- Recommendation:
  - It is recommended to review this structure in such a way that all systems, especially the two CSDs are regulated in a comparable way.
  - BI should consider including KSEI and KPEI in their oversight scope.
  - Bapepam-LK and BI should agree formally on cooperation and coordination of the different responsibilities.
- Responsibility grading: BO

*Source: IMF staff assessment excerpt (chapter 13) contained in the provided content unit.*

### 19. CSDs that establish links to settle cross-border

### 19. CSDs that establish links to settle cross-border trades should design and operate such links to reduce effectively the risks associated with cross-border settlement.

### Summary finding
- Description: There are no current cross border links.
- Assessment: Not applicable
- Comments: - 

### Related system context and key implications from the assessment (extracted from the broader RSSS chapter)
- Legal framework and finality issues:
  - Netting, finality and DVP lack explicit primary-law recognition; netting is supported by Bapepam-LK Rules and KPEI Rules but not by primary law.
  - Finality of settlement is not explicitly specified for securities and cash legs; CML Art 55 suggests securities transfer timing but does not address OTC transactions and fund transfers comprehensively.
  - KSEI rules describe DVP for non-netted stock exchange trades (Article 8.2.1 b), debt securities (Article 8.2.3) and OTC transactions (Article 8.3.1), but not for netted stock exchange trades and participation units (Articles 8.2.1a and 8.2.2).

- Technical settlement arrangements relevant to links:
  - All settlement instructions related to securities and cash are settled in C-BEST; C-BEST mirrors real cash accounts held at four payment banks (CIMB Niaga, Bank Mandiri, Bank Permata and BCA).
  - KSEI has no real cash accounts in C-BEST; C-BEST accounts mirror payment bank accounts and realignments occur six times a day at scheduled times (09:00, 10:30, 11:30, 13:30, 14:20, and 15:10).
  - A small number of trades (on average less than 20% in the period from March 2008 to March 2009) are settled Free-of-payment (FOP), mainly collateral transfers and SBL trades.

- Market infrastructure and operational resilience considerations that affect link design:
  - KSEI operates a direct holding system; about 65% of securities are dematerialized and 35% remain in physical certificate form (immobilized at KSEI).
  - KSEI and KPEI systems use SWIFT for cross-border messaging; about 77% of cross-border transactions are transmitted via SWIFT to KSEI members, but members must convert messages into internal systems and some members consider SWIFT costs too high.
  - Contingency/back-up arrangements: primary and backup sites are 30 km apart; RTO for KPEI systems is 2 hours and in practice the backup site is available within 15 minutes. Simultaneous primary and secondary site outages occurred on 12 November 2009.

- Risk allocation and cash settlement agent exposure relevant to cross-border links:
  - Cash settlement agents are four payment banks with 2009 distribution in value terms: CIMB Niaga 47%, Bank Mandiri 29%, BCA 13%, Bank Permata 0.4%.
  - Use of payment banks exposes participants to settlement bank risk; realignment delays (e.g., if BI-RTGS hours mismatch) can postpone final cash settlement.
  - Recommendation in the report: analyze introduction of cash settlement in the BI-RTGS system to mitigate systemic risks.

### Policy recommendations and operational considerations relevant if links are to be established
- Legal and contractual safeguards:
  - Ensure explicit legal recognition of “netting”, “finality” and “delivery versus payment” in primary law consistent with international definitions.
  - Clarify the timing of transfer of rights for cash: specify whether cash leg finality is in the books of KSEI or in the books of the payment bank.
  - For DVP across borders, ensure the legal framework supports cash finality in the systems used by linked CSDs and payment agents.

- Operational and technical design for safe cross-border links:
  - If links are established, ensure technical DVP is supported end-to-end, including real cash finality in the relevant RTGS or central bank money systems rather than mere mirror accounts.
  - Harmonize operating hours and contingency arrangements between C-BEST, payment banks and BI-RTGS to avoid settlement delays in extreme situations.
  - Encourage full STP adoption and standardized messaging (e.g., broader SWIFT membership or equivalent) so cross-border transactions are transmitted and processed without manual conversion.

- Risk management and membership/access:
  - For cross-border exposures, ensure access and participation criteria for linked systems remain robust and applied in practice (e.g., CCP clearing member access limited to larger, better-capitalized firms).
  - Assess collateral, liquidity and guarantee fund adequacy under cross-border stress scenarios; include back-testing of margin models and regular tests of resource adequacy for the CCP and CSDs.

- Settlement bank and liquidity protections:
  - Evaluate moving cash settlement to central bank accounts (BI-RTGS) to reduce credit and liquidity risk posed by commercial payment banks in cross-border settlement.
  - Define and limit contingent arrangements (e.g., replenishment caps from surviving members) to avoid uncontrolled calls on members in cross-border stress.

### Immediate actionable items (if cross-border links are considered in the future)
- Legal reform to provide explicit recognition of netting, finality and DVP in primary law.
- Technical integration planning to ensure cash finality in central bank money (BI-RTGS) or fully protected settlement bank arrangements.
- Expand SWIFT or equivalent adoption among KSEI members handling cross-border flows and complete STP implementation to reduce operational risk.
- Align business hours and contingency procedures across C-BEST, payment banks and BI-RTGS; increase geographic separation of production and backup sites.

*Source: IMF CPSS-IOSCO Detailed Assessment (excerpt): "19. CSDs that establish links to settle cross-border trades should design and operate such links to reduce effectively the risks associated with cross-border settlement."*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12186.pdf_